LIVE MARKETS-The dichotomy of Wall Street and the dollar

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THE DICHOTOMY OF WALL STREET AND THE DOLLAR

Don't let stocks fool you that U.S. exceptionalism might just be back. When in doubt just look at how the dollar is performing.

In a surprise comeback, the S&P 500 and Nasdaq just capped their best quarter in over a year on Monday, but on the flipside the dollar logged its biggest loss in the first half of a year since the era of free trading currencies began in the 1970s.

"We continue to be underweight on the dollar," analysts at BCA Research said, "as the rebalancing away from U.S. assets will keep putting downward pressure on the greenback."

While most analysts are quick to point to U.S. President Donald Trump's erratic policymaking style being a big reason, BCA Research begs to differ.

The brokerage said that signs of weakening consumer demand among others had already begun long before, while the Federal Reserve has erred on the side of caution, making conditions ripe for markets to witness a lot more interest rate cuts than they are currently pricing in.

Analysts say that further monetary policy easing will likely add pressure on the U.S. dollar. But what about stocks?

Well BCA research says that the recent rally has more to do with expectations regarding investment in artificial intelligence than the health of the economy.

The brokerage says excluding those AI-related sectors, consensus earnings growth for the year is at a paltry 3.8%, down from 9.8% in January as markets price in slowing growth.

Further, BCA expects the trend of a depreciating dollar to continue to shrink returns on stocks.

The U.S. continues to account for an overwhelming portion of investors' portfolios, BCA says, adding that it is underweight the region.

The brokerage instead is overweight on European and Chinese stocks as they are expected to capture the flows out of the U.S., while it also upgraded Japanese equities to overweight, citing higher shareholder returns through buybacks.

(Ankita Yadav)

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